Supply chain management (SCM) is the process of managing the flow of goods and services to and from a business, including every step involved in turning raw materials and components into final products and getting them to the ultimate customer. Effective SCM can help streamline a company’s activities to eliminate waste, maximize customer value, and gain a competitive advantage in the marketplace.
Key Highlights
- Supply chain management (SCM) is the centralized management of the flow of goods and services to and from a company and includes all of the processes involved in transforming raw materials and components into final products.
- By managing the supply chain, companies can cut excess costs and deliver products to the consumer faster and more efficiently.
- Good supply chain management can help prevent expensive product recalls and lawsuits as well as bad publicity.
- The five most critical phases of SCM are planning, sourcing, production, distribution, and returns.
- A supply chain manager is tasked with controlling and reducing costs and avoiding supply shortages.
Daily Operations: How Supply Chain Management Works
Supply chain management represents an ongoing effort by companies to make their supply chains as efficient and economical as possible.
Typically, SCM attempts to centrally control or link the production, shipment, and distribution of a product. By managing the supply chain, companies can cut excess costs and needless steps and deliver products to the consumer faster. This is achieved by tightly controlling internal inventories, internal production, distribution, sales, and the inventories of company vendors.
SCM is based on the idea that nearly every product that comes to market does so as the result of efforts by multiple organizations that make up a supply chain. Although supply chains have existed for ages, most companies have only recently paid attention to them as a value-added aspect of their operations.
The 5 Essential Phases of Supply Chain Management
A supply chain manager’s job is not only about traditional logistics and purchasing but finding ways to increase efficiency and keep costs down while also avoiding shortages and preparing for unexpected contingencies. Typically, the SCM process consists of these five phases:
Planning
To get the best results from SCM, the process usually begins with planning to match supply with customer and manufacturing demands. Companies must try to predict what their future needs will be and act accordingly. This will take into account the raw materials or components needed during each stage of manufacturing, equipment capacity and limitations, and staffing needs. Large businesses often rely on enterprise resource planning (ERP) software to help coordinate the process.
Sourcing
Effective SCM processes rely heavily on strong relationships with suppliers. Sourcing entails working with vendors to supply the materials needed throughout the manufacturing process. Different industries will have different sourcing requirements, but in general, SCM sourcing involves ensuring that:
- The raw materials or components meet the manufacturing specifications needed for the production of the goods.
- The prices paid the vendor are in line with market expectations.
- The vendor has the flexibility to deliver emergency materials due to unforeseen events.
- The vendor has a proven record of delivering goods on time and of good quality.
Supply chain management is especially critical when manufacturers are working with perishable goods. When sourcing goods, companies should be mindful of lead times and how well-equipped a supplier is to meet their needs.
Manufacturing
This is the heart of the supply chain management process, where the company uses its machinery and labor to transform the raw materials or components it has received from its suppliers into something new. This final product is the ultimate goal of the manufacturing process, though it is not the final stage of supply chain management.
The manufacturing process may be further divided into sub-tasks such as assembly, testing, inspection, and packaging. During the manufacturing process, companies must be mindful of waste or other factors that may cause deviations from their original plans. For example, if a company is using more raw materials than planned and sourced for due to inadequate employee training, it must rectify the issue or revisit the earlier stages in SCM.
Delivery
Once products are made and sales are finalized, a company must get those products into the hands of its customers. A company with effective SCM will have robust logistic capabilities and delivery channels to ensure timely, safe, and inexpensive delivery of its products.
This includes having a backup or diversified distribution methods should one method of transportation temporarily be unusable. For example, how might a company’s delivery process be impacted by record snowfall in distribution center areas?
Returns
The supply chain management process concludes with support for the product and customer returns. It’s bad enough when a customer needs to return a product, but even worse if that’s due to an error on the company’s part. This return process is often called reverse logistics, and the company must ensure it has the capabilities to receive returned products and correctly assign refunds for them. Whether a company is conducting a product recall or a customer is simply not satisfied with the product, the transaction with the customer must be remedied.
Returns can also be a valuable form of feedback, helping the company identify defective or poorly designed products and making whatever changes are necessary. But without addressing the underlying cause of a customer return, the supply chain management process will have failed, and future returns will likely persist.
Transform Your Business: Types of Supply Chain Models
Supply chain management does not look the same for all companies. Each business has its goals, constraints, and strengths that will shape its SCM process. Here are some models a company can adopt to guide its supply chain management efforts:
- Continuous flow model: Often best for mature industries, this model relies on a manufacturer producing the same good over and over, expecting little variation in customer demand.
- Agile model: Ideal for companies with unpredictable demand or custom-order products, this model prioritizes flexibility and readiness to pivot accordingly.
- Fast model: Emphasizes quick turnover of products with short life cycles, aiming to capitalize on trends, quickly produce goods, and ensure the product is sold before the trend ends.
- Flexible model: Best for companies affected by seasonality, ensuring that production can be easily ramped up or wound down based on peak or off-peak seasons.
- Efficient model: Suitable for industries with tight profit margins, focusing on maximizing efficiency in equipment use, inventory management, and order processing.
- Custom model: For highly specialized sectors with high technical requirements; companies in these industries often develop unique, tailor-made SCM models.
Real-World Success Story: Example of SCM
Realizing the critical importance of SCM to their operations, Walgreens Boots Alliance Inc. transformed its supply chain by investing in technology. By leveraging big data from its 9,000 stores and 20,000 suppliers, the company improved its forecasting capabilities and better managed sales and inventory. In 2019, it appointed its first-ever chief supply chain officer, emphasizing the strategic significance of efficient SCM.
Moreover, Walgreens integrated its supply chain management into its environmental, social, and governance (ESG) initiatives, covering human rights, sustainability, and product transparency.
The Vital Role of Supply Chain Management
Supply chain management is core to achieving various business objectives. Proactive SCM can improve product quality, decrease the risk of recalls and lawsuits, and enhance customer satisfaction by preventing shortages or excessive inventory. Notably, SCM also provides opportunities to boost profit margins, a critical aspect for businesses with large or international operations.
Ethics in Supply Chain Management
The integration of ethics in SCM has become essential. Modern consumers and investors are increasingly concerned about product sourcing, workforce treatment, and environmental impacts, leading companies to adopt ethical practices in their supply chains. Measures to reduce waste, improve working conditions, and diminish environmental footprints are now integral to SCM.
The Bottom Line
A well-managed supply chain starts with ordering raw materials or components from a supplier and ends with the delivery of a finished product to the end consumer. Each link within this chain presents an opportunity for value addition or inefficiency reduction. Effective SCM can boost a company’s revenues, reduce costs, and support profit growth.
Related Terms: logistics, inventory management, procurement, distribution.
References
- Cision PR Newswire. “Walgreens Transforms Supply Chain Management with Kyvos, Tableau, and Big Data”.
- Walgreens Boots Alliance. “Walgreens Boots Alliance Announces Key Leadership Appointments Live”.
- Walgreens Boots Alliance. “Environmental, Social & Governance.”
- Salary.com. “Supply Chain Manager Salary in the United States”.
